The Corporate Transparency Act takes aim at corruption but can impact mom-and-pop LLCs

At the heart of the CTA is the creation of a confidential registry managed by FinCEN, the Treasury Department’s financial crimes enforcement unit. Companies incorporated in the U.S. will be obligated to file reports about their beneficial owner(s) at the time of company formation. These reports must contain identifying details like names, birth dates, home addresses and images of driver’s licenses or passports. Strict reporting criteria determine who qualifies as a reportable beneficial owner.

In tandem with the registry, the Corporate Transparency Act effectively eradicates anonymous “bearer share” corporations frequently abused by criminals. It works by prohibiting states from approving the establishment of new companies that issue “bearer” shares, which accord ownership to whoever possesses a company’s stock certificate. By requiring these entities to record owners in their books, anonymity is stripped away.

To compel obedience among company owners and state officials, the CTA institutes strong civil and criminal penalties. Willful failure to file accurate ownership reports will incur fines up to $500 per day. False statements bring fines up to $10,000 or up to two years in prison. States that fail to comply risk losing federal funding.

By illuminating the humans pulling the strings behind shell companies, the Corporate Transparency Act delivers a heavy blow to money laundering conspirators of all kinds. If enforced effectively, dirty money flowing freely through opaque corporate vehicles could soon become a phenomenon of the past.

While the CTA's primary focus is on larger corporations, it also has implications for many mom-and-pop LLCs. Here are some of the implications:

• Reporting requirements. Starting January 1, 2024, newly formed domestic LLCs will be required to file initial reports with FinCEN within 90 days of formation (in 2024 only). Existing LLCs will have a phased-in reporting deadline starting January 1, 2025.


• Beneficial ownership information. These reports must include detailed information about the LLC's beneficial owners, including their full name, date of birth, address and Social Security number or other identifying information. A beneficial owner is defined as an individual who exercises substantial control over an LLC, either directly or indirectly, through ownership or other means.


• Exemptions. Certain entities are exempt from the CTA's reporting requirements, such as publicly traded corporations, certain types of investment funds and businesses with more than 20 employees and more than $5 million in annual gross receipts.

While many mom-and-pop LLCs may fall under the exemption threshold, some may still need to comply with the reporting requirements. This additional administrative burden could include gathering and verifying beneficial ownership information, filing reports with FinCEN and maintaining accurate records.

Businesses may incur costs associated with gathering beneficial ownership information and filing reports. However, these costs are expected to be minimal for many mom-and-pop LLCs.

The CTA's reporting requirements will make it easier for law enforcement and financial institutions to identify the true owners of businesses, which can help to prevent illicit activities and enhance financial security.

Mom-and-pop LLCs, the embodiment of America's entrepreneurial spirit, form the backbone of the nation's economy. These small, family-run businesses, often started with a dream and a lot of hard work, have become an integral part of communities across the country. From neighborhood grocery stores to local hair salons, mom-and-pop LLCs provide essential services and add a unique character to every town.

Here are some of the factors that are typically considered when determining whether a business is a mom-and-pop operation:

• Size. Mom-and-pop businesses are typically small, with only a few employees. In this case, the couple would be the only employees of the business.


• Ownership. Mom-and-pop businesses are typically owned and operated by the same people. In this case, the couple would be the sole owners of the business.


• Management. Mom-and-pop businesses are typically managed by the owners themselves. In this case, the couple would be responsible for all aspects of running the business.

An older married couple who owns apartments for rent might create an LLC that would be considered an example of a popular type of mom-and-pop business. Retail stores are another staple among mom-and-pop LLCs. These businesses offer a wide variety of goods, from everyday necessities to unique and specialized items. Clothing boutiques, antique shops, bookstores and toy stores are just a few examples of the many retail mom-and-pop LLCs that thrive in communities across the country.

Restaurants and cafes are yet another common form of small LLC. One whiff of the aroma of freshly brewed coffee and the sound of the sizzle of a hot grill provide a clear indication of a mom-and-pop restaurant or cafe. These establishments provide a place for people to gather and socialize. From family-friendly diners to upscale eateries, mom-and-pop restaurants and cafes bring culinary delights to neighborhoods everywhere.

Meanwhile, mom-and-pop LLCs in the personal services industry offer a wide range of services that cater to the diverse needs of individuals. Hair salons, barbershops, nail salons and massage parlors are just a few examples of these businesses. Mom-and-pop personal service providers often develop close relationships with their clients, creating a sense of community and trust.

LLCs that provide repair and maintenance services are another common type. From fixing a leaky faucet to repairing a broken appliance, mom-and-pop repair and maintenance services play a crucial role in maintaining homes and businesses. Plumbers, electricians, carpenters and handymen are just a few examples of the skilled professionals who keep communities running smoothly.

In short, mom-and-pop LLCs add vibrancy and diversity to communities, catering to the passions and interests of their patrons. They are more than just businesses; they are the embodiment of the American dream. They represent hard work, dedication and the spirit of entrepreneurship.

In order to comply with the CTA, here are some recommendations for mom-and-pop LLCs:

• Understand the CTA. Familiarize yourself with the CTA's requirements, exemptions and reporting deadlines to determine if your LLC needs to comply.


• Gather information. Begin gathering beneficial ownership information as soon as possible, especially if you anticipate forming a new LLC or if your LLC falls outside the exemption threshold.


• Seek guidance. If you have questions or need assistance, consult with an attorney or other qualified professional to ensure compliance with the CTA's requirements.


• Maintain records. Keep accurate and up-to-date records of beneficial ownership information to facilitate reporting and future compliance.

By proactively understanding and complying with the CTA's requirements, mom-and-pop LLCs can contribute to a more transparent and secure financial system.

While the CTA has been praised for its potential to improve financial security, it has also been criticized for potential drawbacks.

Let’s examine some of the potential pitfalls of the Corporate Transparency Act.

• Increased compliance burden. The CTA's reporting requirements may impose an additional administrative burden on businesses, particularly small mom-and-pop LLCs. Gathering and verifying beneficial ownership information, filing reports with FinCEN and maintaining accurate records could require significant time and effort.


• Potential costs. Businesses may incur costs associated with gathering beneficial ownership information and filing reports. These costs could include software fees, professional services and the time spent by employees on compliance activities.


• Privacy concerns. Some critics argue that the CTA's collection of sensitive personal information such as names, dates of birth and addresses raises privacy concerns. They worry that this information could be misused or accessed by unauthorized individuals.


• Potential for overreach. The CTA's broad definition of "beneficial owner" could lead to overreach, potentially capturing individuals who do not have substantial control over an entity. This could create unnecessary burdens for individuals and businesses.


• Potential for unintended consequences: Critics argue that the CTA's emphasis on transparency could create unintended consequences, such as discouraging investment in certain industries or making it more difficult for individuals to protect their assets from criminals.

While the CTA's goal of enhancing transparency is commendable, it is crucial to strike a balance with practicality and minimize potential burdens on businesses and individuals. Carefully considering exemptions, streamlining reporting processes and providing clear guidance can help mitigate some of the drawbacks.

Overall, the CTA represents a significant step toward combating illicit activities and enhancing financial security. However, it is essential to carefully consider and address potential drawbacks to ensure that the law achieves its objectives without unduly burdening businesses and individuals.